Nvidia Corporation (NASDAQ:NVDA) shareholders have been frustrated for most of this year thanks to a droopy performance in the wake of an explosive 2016. But no more. NVDA stock is charging out of the gate Tuesday night in the wake of a big Street-beating first-quarter earnings report.
I’ve admittedly been rather cautious toward Nvidia shares over the past few months. Considering a potential slowdown in GPU revenue, competition in the automotive industry after Intel Corporation (NASDAQ:INTC) acquired Mobileye NV (NYSE:MBLY) and simple valuation concerns, I didn’t trust the rally in Nvidia stock.
With NVDA shares up 13% after-hours Tuesday following what looks like a major Q1 FY18 earnings beat, however, that caution looks cowardly at the moment.
I wasn’t the only one skeptical, as a series of analyst downgrades knocked Nvidia stock off highs around $120. But shares very well may challenge those levels again, as Tuesday’s report looks solid across the board. Nvidia’s core gaming business is performing strongly, and new market opportunities in automotive and datacenter continue to develop.
In fact, not only does Nvidia’s Q1 seem likely to quiet the bears — myself included — but it looks increasingly likely that NVDA stock should see even more upside, even after Tuesday’s double-digit burst.
Nvidia Earnings Strong Across the Board
What jumps out from Nvidia’s report is not just the consensus beat, but rather the broad strength in the quarter. Revenues of $1.94 billion were up 48% year-over-year and topped expectations for $1.91 billion. Earnings of 85 cents per share rocketed 85% higher and beat the Street by 18 cents.
But it wasn’t just the headline numbers. Everywhere you looked, NVDA flexed its muscles.
GPU sales were up 45% year-over-year. Any fears of a slowdown in gaming market revenue were dispelled by 49% growth in that vertical. Sales to Datacenter customers — a key growth area — increased 186%.
Automotive channel sales grew 24%, which in the context of the quarter, appears to be the lone disappointment (if only on a relative basis). OEM and IP revenue did decline, and Nvidia recognized the last of its revenue from a cross-licensing agreement with Intel. But that revenue is down to just 8% of the total, and growth elsewhere can easily paper over those concerns.
The news on the margin front was even better, as evidenced by the magnitude of the earnings beat. Non-GAAP gross margin rose 100 basis points. Opex increased just 17%, well below the rate of top-line growth. That leverage drove operating income to nearly double, with adjusted EBIT up 98% and non-GAAP net income up 103%.
Other than automotive, Q1 looks like a flawless quarter. And when a company releases results where 24% segment growth (as was the case in automotive) is the weakest aspect, its stock seems likely to soar.
That’s certainly the case for NVDA stock, at least in the first couple of hours following this report.
Does Q1 Change the Long-Term Case?
The question coming out of Q1 results is whether the numbers mitigate the long-term concerns toward NVDA stock — notably in terms of valuation.
From here, they do.
It’s not just first-quarter performance that beat; Q2 guidance looks exceptionally strong as well. Second-quarter revenue is guided up 36% year-over-year; a modest deceleration relative to Q1, but still in line with FY17’s 38% growth and ahead of analyst estimates for 33% growth. Implied guidance suggests Q2 EPS of 81 cents, ignoring the impact of share repurchases and NVDA’s convertible bonds on diluted share count. At that number, Q2 earnings would double year-over-year, and the guidance is well ahead of Street consensus for Q2 of 61 cents.
It’s not just the numbers that matter. The series of bearish analyst reports that ended the rally in NVDA stock largely were based on valuation. But given Q1 results and Q2 guidance, valuation suddenly looks like a poor reason to short Nvidia stock.
There were concerns that the turnaround at Advanced Micro Devices, Inc. (NASDAQ:AMD) might lead to share losses and/or pricing pressure for Nvidia’s GPU business. Those concerns seem silly at this point. And any fears of a near-term to the upgrade cycle in Gaming seem too early — at least.
Is NVDA Stock A Buy?
With Nvidia back toward $117 in after-hours trading, the question is whether shares are still a buy. And as bearish as I’ve been of late, it’s difficult not to reverse field. FY18 EPS seems likely to move toward the $4 range, implying a more palatable ~27x EPS multiple plus cash.
Nvidia has at least one more quarter to benefit from the upgrade cycle in gaming, and certainly more. Datacenter revenue growth shouldn’t slow for years. The automotive market represents a huge opportunity.
NVDA still looks expensive — but not terribly so in the context of Q1 growth. Ex-cash, Nvidia stock now trades at under 30 times trailing EPS. That’s a high multiple for the semiconductor space — but not necessarily for a company growing revenue at 48% and non-GAAP EPS at 85%, as was the case in Q1.
The bearish arguments toward Nvidia seem largely negated by the results. Yes, it’s just one quarter – but it’s a heckuva quarter.
It’s hard to argue that Q1 doesn’t change the case for NVDA stock.
As of this writing, Vince Martin did not hold a position in any of the aforementioned securities.